If you’re interested in the stock market or creating an investment portfolio you’ve probably come across the word ‘diversification’ more than once. Investment experts use this word a lot when it comes to the share market, as a well-diversified portfolio can protect your assets if the market takes a downturn.
Find out more about creating a diverse investment portfolio and how it can benefit you.
What is Diversification?
Diversification is an investment strategy that means acquiring not just one type of investment but a mixture of a wide variety in a portfolio. The rationale being that it’s very unlikely that all the investments will perform badly at once. For instance, it’s better to invest in shares on-shore as well as off-shore, because the local and overseas markets will have different economic factors affecting them.
However, the experts say it’s better to spread your investments even wider because the wider the spread of investments, the higher the returns and the less the risk factor that the portfolio will lose value. This means choosing a number of different investments vehicles, so not just high-risk shares but low-risk fixed cash, bonds and property. The combination of high risk and low risk investments averages out so you can weather most storms.
Note that this is under normal market conditions. In a stock market depression, even a well-diversified portfolio will lose value, but you may be more protected than someone who isn’t diversified.
How Can I Have a Diversified Portfolio?
If you have a limited investment budget you might think a well-diversified portfolio is out of your reach. It’s true that it is more difficult to achieve with a small amount of capital which is why managed funds are becoming increasingly popular.
A managed fund is a pool of money from numerous small investors that offers investments in shares, property, fixed interest, cash & more, and can be set-up for as little as $500. There is usually an opportunity to invest a regular weekly amount or make a one-off contribution which goes into buying units. You earn dividends on your units quarterly or bi-annually depending on the type of fund, and these can be either reinvested or paid out.
These type of funds are generally operated by a manager, who invests the capital into different classes. A managed fund can be a convenient way to diversify investments without having to worry about shares, real-estate and savings which can be stressful for people who aren’t financially orientated.
Self-managing your portfolio
If money isn’t an issue and you want to create a diversified self-managed portfolio then consider not putting all your eggs in one basket. If you invest in several asset classes, you could also further diversify within those classes. For instance, buying a mix of Australian and global shares, and in various industries is a tactic to lower your volatility. Diversification works best when different asset classes are not connected.
To help you keep track of your investments, and plan for the future, Financial Mappers provides the hub for your information and can calculate investment forecasts up to 30 years. To find out more, visit Financial Mappers.
Disclaimer: Financial Mappers does not have an Australian Financial Services License, does not offer financial planning advice and does not recommend financial products.